February's economic growth reflects a world that no longer exists

Expectations had been for a sluggish start to 2026 for the UK economy as it battles against low productivity and a struggling labour market.

Today’s figures also came with a revision of January’s figures, upgrading them to 0.3%, giving us a total of 0.8% year to date. Without any context, this is a positive start, although we saw a similar false dawn last year.

The big difference this time is the outlook remains so uncertain. Today’s growth figures only consider the first few days of the US-Iran conflict, and therefore, the true fallout is yet to be felt. 2026 was supposed to be the year the government was hoping to build on following a challenging first 18 months in power, but there is a chance all that work may have just been undone by events out of Labour’s control.

Forecasts are for far worse growth figures to come as inflation spikes and rising energy bills hit consumer and business confidence. Indeed, just this week, the IMF slashed its growth forecasts for the UK from 1.3% to 0.8% in 2026, the worst revision within the developed world. With the economy already achieving a run-rate of 0.8% growth on the same period last year, the implication is that headwinds will build from here on. Although the UK is expected to bounce back somewhat in 2027, the UK economy remains particularly at risk from global shocks.

There is a very delicate ceasefire in place in Iran, which has helped to quell some of the energy price rises we saw, but we should not expect things to simply return to how they were in the event of a more formal deal. Talk now is of interest rate hikes this year, rather than cuts from the Bank of England. Whilst it may be the case that tough talk from the monetary policy committee will be enough to keep inflation expectations in check, limiting the long-term impact of a temporary energy price effect, there will also be concerns that with the growth outlook so muted, any hike to rates could be enough to snuff out growth entirely, given the UK’s weakened position.

For consumers, today’s figures represent a very different world. We now have higher petrol prices, higher mortgage rates and potentially higher energy bills (in time), and that is unfortunately something we will have to get used to for the next few months at least. The jobs market isn’t strong enough to demand pay rises to offset this, and as such, disposable incomes are likely to be hit, making the cost of living a pressing issue once again.

This conflict also has further ramifications for the UK economy and how Labour governs. Bond yields have climbed sharply since the onset of the conflict and the fiscal headroom built by Chancellor Rachel Reeves has probably been completely eroded as government interest costs have risen.

That will mean the Autumn budget is likely to bring a familiar combination of tax rises and spending cuts – although how much consumers and the economy can stomach remains to be seen.

Meanwhile, there is a growing sense that a leadership challenge could emerge in the coming months. If local elections go badly for Labour and Angela Rayner continues to attempt her public rehabilitation, potentially pushing Labour further to the left, this could push bond yields up even further as spending increases, putting further pressure on what was a fragile economy entering 2026.

The good news is that the UK stock market has been one of the more resilient ones this year, thanks to its weighting towards companies in the oil and defence sectors. Markets are already assuming the conflict is all but finished, and, as such, share prices overall have held up well, protecting already high levels of savings.

The rest of this year, however, is looking more uncertain as the UK economy finds itself in a weakened position despite a strong start to the year. For consumers, inflationary shocks are coming, so it is important that they plan their finances to absorb them as best they can.

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Lindsay James is an investment strategist at Quilter.

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